Will a Canadian ratings agency dictate the dollar's fate?

Although it may be tempting to see yesterday as some sort of turning point, with global equities finally reacting negatively to bad news, it's probably premature to say that the top is definitively in. After all, while Nikkei futures cratered more than 1000 points yesterday and US GDP was even lousier than expected, the SPX didn't even decline a percent. Meanwhile, Eurozone banks actually closed up on the day, fueled partially by surprising earnings from perennial whipping boys DB.

Still, the day was not without points of interest. What started as a yen rally morphed into a dollar decline, with the buck falling against just about every currency on Macro Man's screen. This was somewhat curious, insofar as the model community is still very short of USD/JPY and there wasn't a big embedded discretionary dollar long to get flushed, either.

Perhaps the FX market was reacting as much to the GDP figure as it was to the BOJ? After all, the number illustrated broad-based weakness and allowed fixed income to rally even more, albeit more so at the front end of the curve than the long end.

One feature of interest was the PCE deflator, the core component registering its largest quarterly rise in 5 years (at a pace above the Fed's target!) You can back out the reading for today's monthly PCE deflator figures from the quarterly data; assuming no past revisions, it looks set to come in at 0.14% m/m and 1.6% y/y. In other words, pretty much in line.

That dollar weakness extended into commodities was illustrative of the breadth of the move and how little demand there was for the greenback in any quarter. Who knew that the best way to goose commodities was to quit easing policy (other than the neo-Fisherians, of course)? Perhaps Kuroda-san watched The Godfather II recently, as the decision to do nothing was redolent of Michael Corleone's offer to Senator Geary.

In any event, GDX put in another good day, rallying nearly 4.5% and breaking to new highs. It's nearly at the top of its Bollinger band, which could be a cause for caution, though it's spent much of the time since February pushing against then top of its (expanding) band with no notable deleterious impact on performance.

Just how realistic is continued dollar weakness, however? After all, there is very little at all priced for June now, so the asymmetry of risk is clearly tilted towards hawkish guidance from the Federales. Interestingly, Macro Man has heard some rumblings of previously-sidelined discretionary macro guys entertaining the notion of getting short USD/JPY at current levels. From his perspective, that horse has already bolted, and we're likely a lot closer to the end of the downdraft than the beginning.

Curiously, the near term catalyst could come from a ratings agency in Canada. DBRS is the only major rating agency that maintains an investment grade rating on Portugal, and they are due to complete their ratings review today. Should they downgrade the Portugeezers to junk, that will eliminate their eligibility to participate in the ECB's PSPP program. Although Portuguese bonds have widened somewhat versus Bunds recently, they're pretty clearly not priced for crisis.

Yet elimination from ECB purchases would surely be a crisis, and could stoke broader concerns within the Eurozone, particularly with a wave of Greek maturities approaching like a freight train and no plan in place to navigate them? And if Europe sinks into the more again, how realistic is ongoing dollar weakness, really?

(As an aside, while the RMB fix did strengthen against the USD by the most since 2005 last night, it actually weakened against the basket.)

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Even if Portugal would lose its rating, as long as the country is in a bailout programme and passes the regular hurdles of it, the ECB could continue buying Portugal's bonds.

So even if the investment grade-rating would be taken away, investors would (after the initial negative reaction, which is required so that Portugal would be forced to request a new bailout programme and credit line) front-run the ECB.

Dont know MM, your $ call seems prescient based on fundamentals. But the $ seems to be all about expectations that will not be met if vol picks up as it looks like it will. I mean how do you calculate whether the safe haven bid will win out over the death of the "fed will hike" narrative. To close for me to want to call.

On the USD. US inflation has picked up more than other areas (Europe, Japan, etc.) causing US real yields to decline on a relative basis. Is this accurate and does it explain any of the recent USD weakness?

Generally speaking, the more a poster/category of posters say "I told you so" without adding anything else, the less welcome they are. Merely asking where those cretins are on days when the equity market happens to be down is 0.000001% as annoying as the crowing they do whenever Spooz pop more than 5 points.

"Most important, the labour market continues to fizz. Payrolls swelled by 215,000 in March—well above the level of employment growth needed to reduce slack in the economy. Even the labour-force participation rate, which had tumbled, is now recovering (see article). Ms Yellen recently said the Fed is “coming close” to its goal of full employment.

Inflation—the Fed’s other target—is also rising. The Fed’s preferred index of core inflation, which excludes volatile food and energy prices, is up by 1.7% year on year. The last time it was this high was in July 2014, just before oil prices tanked. Headline inflation is lower, at only 1%, but core inflation is generally a better predictor of where the headline rate is headed. As a result, simple so-called “Taylor rules” for monetary policy, which take into account both unemployment and inflation, suggest that lift-off is well behind schedule. This is true even when you adjust them in ways that Ms Yellen has advocated (see chart)."

...You are already at full employment...not close, but AT....it appears some leaders just dither and dither...

You are right about Fed being CB of the world, almost. As PBOC, BOJ, ECB are still have significant impacts in their respective universes.

However, Fed cannot provide liquidity simply by its words. It needs to back it up by action. So far there is no action. And words can only carry the markets to the certain point. And we are near that point.

This is simplified opinion of course. And the market will retest its top again, and again. So spoo is likely to come back to 2100 in the near future and if that holds, watch out.

I decided to hold off on dollar longs at the end of the week. It looks like there is a reasonable chance dollar longs get hammered for another week or 2. I think perhaps 90 would be a good place to look at getting long USD. If it corresponded with oil in the high 40's, then even better. 100-103 on USD.JPY, 0.8 on AUD.USD and 1.17 on EUR.USD would also be good areas to look for reversals.

BOJ: still have 2 dissenters on the board for nuclear action. Pol may be right though and that may happen at some stage, but I would guess they need to get the dissenters out and have a consensus for a major change given the issues recently with the NIRP effect and the FX market being quite unruly in terms of following CB directions of late.

If we have a continued dollar correction in the next 2 weeks, it may well be an excellent place to look for long dollar entries. If there is a sell in May effect, that could be a ripper and add to the momentum in any dollar turn.

In short, it looks suspiciously like we are building to a major turn and that is exciting, given the last few months of countertrend movement and sideways chop.

Boog good call on waiting on the sidelines on the dollar - I'd definitely not be walking this funny if I'd listened to you. Your other targets, regrettably in hindsight, make a lot of sense also.

If the Yen does weaken from 102 like you say, I struggle with what it means for risk appetite for equities - usually tech used to lead risk in that regime, with energy getting spat on - I am clueless on what happens this time around (and a lot of other things, clearly..) - so weird that everyone applauds this spring's equity rally's amazing breadth, but when we had the kind of narrow leadership we had up to now with basically everyone short everything except tech and some value stuff, clearly by definition a short squeeze would be a mirror image and exhibit breadth.

First its EU banks that throw the monkey wrench into the reflation trade, and now its Dollar/Yen. But I'm not so sure how much you want to extrapolate real global risk to what seems like isolated problems, even though in the past both markets have been 'tells' for global risk contagions. While Japan, BoJ and Nikkei will certainly be front and center, not sure how much a strong yen really means to any business. If you are a currency war person, certainly this is less pressure now.

Equities for sure over bought short term as they have done a one way move since Feb. Valuation isnt compelling, getting near old resistance. But I just dont want to short when XME/Materials are rallying hard. To me the biggest risk is China, a weaker yen going nuclear, not EURJPY gaining. Oil, EM FX etc matter much more in the real world. But lets see. I worry about Chinese real estate and the latest lending/spending binge blowing over as the real risk.

Washed: I think you have a pretty good clue. The setup on going long dollar last week was very tempting. The only reason I didn't was because of the massive wedgie I had the last time I went long dollar (last ECB meeting). Anyone who has been long dollar in the last 3 months has probably had a wedgie or 2 between the BOJ x 2 meetings, ECB x 2 meetings and even the NZD has been rallying quite wickedly despite the recent central bank rate cut.

So after these recent experiences people will be wary going long the dollar and the bar will be set higher for a good level to go long again. We may get a dollar rally with more hawkish talk but I tend to think we are beyond that for a while. A weaker than expected Q2 GDP bounce is getting priced in, so June hike may well get fully priced out too. I tend to think no one will buy rate hike talk for the rest of the year and the next move higher in the dollar will probably be on risk aversion rather than rate hike expectations. If this is not the case, I'd be happy to jump on board for one last swing.

JPY: the move in that is hard to understand. I think it is so far mainly just dollar correction and unwinding of equity currency hedges. It certainly hasn't been due to general risk aversion and it hasn't affected the reflation trades. The carry currencies have been doing well despite the yen strength. Some of the recent yen strength after the BOJ decision to stand pat may be companies putting on more hedging for yen exposure.

It is hard to guess how much further the yen would rally in a risk aversion situation. I am thinking, not much but maybe it could. In terms of playing a strong dollar if DX gets to the 90 area, I would be thinking usd.cad, aud.usd and not yen as a primary vehicle of going long dollar.

Abee: it does seem the Chinese have given the old lending/fixed asset investment/property another burl. They have found some more road to kick the can down there. I wonder whether a U.S recession, whenever that happens, will kill the Chinese economy or whether their strategy is good for a few more spins.

Well, China's bad debt risk certainly is rising. Deep pay cut is wide spread for employees from those local small banks, who made some decent money last year. I have heard that some local small banks mostly hold those bad debts and are likely to go down this round. Some even suggest that it is the intention to let them down and take those bad debts with them.

Retail speculators are rushing in the commodity future market, with huge leverage. When materials are rallying hard, I am confident that it is mostly supported by the speculative capital flow. So materials can go down as fast as it went up. So those who are long basic metal now should keep one eye open during their sleep IMO.

And money is in shortage again. It is reported that companies are increasingly using commercial acceptance bills to pay for commercial transactions, instead of checks or money orders previously. Shibor is also on the rise, so watch out for a crash in China somewhere (my bet is on commodity future in China) and the following PBOC intervention.

Regarding the future market in China, here is a set of numbers I found: on 4/21, the total value of steel bar future contracts traded in China was about USD93.6 billion in that day, compared to the total value of stocks traded in Chinese stock markets in the same day-USD83.6 billion.

The volume of steel bar underlying the future contracts traded that day is higher than the total steel bars manufactured in China in the whole year of 2015.

The commodity prices can go higher from here of course. But I am betting that the whole thing will fall apart rather violently.